Buy-to-let warning for novice landlords

Reports of growing turbulence in the buy-to-let market abound. Should we be concerned, or is the underlying business proposition still robust?

A quick look behind the sensationalist headlines reveals that in most cases the increased number of buy-to-let repossessions in Q1 2007 were actually the result of misrepresentations.

For example, the Financial Services Auth-ority has been reviewing a number of buy-to-let repossessions and found that many of the loans had been given to people who claimed they were going to live in the properties.

Some had even said they were first-time buyers, thereby wrongfully obtaining higher LTV deals.

Not surprisingly, when rates in-creased last year these borrowers had no rental cover cushion to soft-en the blow.

They will also have bypassed the safeguards that come into play when taking out buy-to-let mortgages, such as valuers’ reports identifying likely rental levels.

So the chances are novice landlords bought properties that were probably not suitable as rentals, otherwise they would have been easily sold in the professional market with no capital loss to len-ders or borrowers.

Elsewhere, the In-land Revenue has been investigating a number of buy-to-let owners. The department has uncovered a number of landlords who have not been declaring their full income.

While the details are sketchy, one would surmise that either the taxpayers omitted to declare their rental in-come or the gains made on sales.

It could be their monthly mortgage payments have been offset against income for tax purposes rather than just the interest element so their income has been under-declared.

Either way, untutored investors have come unstuck again.

On the other hand, it’s true that a number of landlords divested some of their rental assets in Q1.

But with solid capital growth over the past few years, profit-taking is not altogether surprising.

Rental yields improve as affordability decreases and prospective buyers wait out higher rates, but there is a lag.

So smart investors with growth under their belts will make profits in a rising rate environment.

In addition, a number of sellers put their properties up for sale in advance of the mooted introduction of Home Information Packs. So the sell-offs are hardly unexpected.

The underlying message appears to be that in times of financial stress experienced investors will make money and novices may not fare so well.

So I don’t think it will be long before lenders recognise this and differentiate by pricing or credit availability. Portfolio analyses to identify which brokers introduce better business are critical in a market witnessing compressed margins and declining loan volumes.

Fighting for market share with no re-gard for asset quality will harm both balance sheets and the buy-to-let segment.

But the demand for credit is robust. Lenders simply need to segment the market in a more sophisticated way to unlock its full potential.